Portfolios of the Poor

Imagine living on just two dollars per day. How would you make sure your family eats, your kids go to school, and there’s money for emergencies? Portfolios of the Poor: How the World’s Poor Live on $2 a Day by Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven shatters the myth that the poor live purely hand-to-mouth. Instead, it shows that managing money—however little—is both a daily challenge and an astonishing act of creativity.

The authors argue that poor households, far from being “financially excluded,” are active money managers who deftly juggle savings, loans, and informal credit systems. What truly distinguishes their lives isn’t just low income—it’s the irregularity and unpredictability of that income. Dollars trickle in, stop suddenly, or arrive in lump sums. To survive, the poor must make uneven cash flows stretch across everyday needs, risks, and future hopes.

The Financial Diaries: Seeing Daily Survival in Numbers

To uncover how this works, the authors invented “financial diaries”—a rigorous and intimate method that tracked more than 250 low-income households in Bangladesh, India, and South Africa for a full year. By visiting families twice a month and tracking every rupee, rand, or taka earned, saved, borrowed, or spent, they discovered a world of constant financial motion. Poor families rarely consume their entire income; instead, they push and pull cash through complex portfolios of savings, loans, and credit relationships.

In one notable case, Hamid and Khadeja, a couple living in a Dhaka slum on $0.78 per person per day, managed six financial instruments simultaneously—life insurance savings, cash stashed at home, loans to relatives, and microfinance debts. Despite limited income, their financial turnover over a year exceeded their annual earnings. These “financial flows” revealed that even the poorest constantly balance risk and opportunity like small business owners.

Beyond Hand-to-Mouth: The Triple Whammy

At the heart of poverty lies what the authors call the triple whammy: low incomes, irregular payments, and weak financial tools. Poor households don’t just earn little—they earn it unpredictably, often relying on casual work, self-employment, or temporary jobs. The state offers little safety net, and informal tools like moneylenders or community savings clubs are unreliable. Managing under these conditions demands constant vigilance, or as one diary participant put it, “These things are important—they keep you awake at night.”

For richer people, financial life involves investing wealth or minimizing taxes. For the poor, it’s about ensuring there’s enough money for food tomorrow and medicine next week. In this light, financial management isn’t an optional skill—it’s survival itself.

Why Better Financial Tools Could Transform Lives

The authors contend that the poverty problem isn’t just about aid or income—it’s about the reliability of financial access. If poor households had trustworthy tools to save, borrow, or insure themselves, their chances to improve life would rise dramatically. This insight reframes global development debates: while organizations focus on charity or globalization, the book insists that empowerment begins with access to practical, reliable financial services.

Microfinance, exemplified by Muhammad Yunus’s Grameen Bank, has already begun this transformation. By proving that the poor can repay loans responsibly, microfinance redefined them as “bankable.” But the book warns that progress remains incomplete—most microfinance institutions still emphasize loans for business while ignoring everyday cash-flow needs, savings disciplines, and insurance options. True financial inclusion must, therefore, go beyond lending and embrace savings, flexibility, and reliability.

Why This Matters to You

Whether you’re a policymaker, entrepreneur, or global citizen, the takeaway is clear: poverty isn’t only lack of money—it’s lack of control over money. Think of how your own financial stability depends on predictability, savings, and trusted institutions. Now imagine none of those are secure. Understanding the portfolios of the poor helps us design systems that make money management possible for everyone—no matter how little they earn. As the authors remind us, even at two dollars a day, the ingenuity of financial survival is universal.

If you had to feed your family on uncertain income, how would you do it? That’s the daily puzzle facing households like Subir and Mumtaz in Dhaka, Bangladesh. Living on about a dollar per person per day, their incomes swing wildly—one day they earn enough, then nothing at all. Yet they manage, thanks to what the authors call cash-flow management: an ongoing improvisation to make money available at the right time.

Small Balances, Big Flows

The diaries reveal an astonishing finding: although financial balances are small, cash flows are huge. Every few days, money moves in or out—borrowed, lent, saved, repaid. The authors call this “cash-flow intensity of income.” In India, median households cycled up to twice their monthly income through financial instruments; in South Africa, up to five times. The poorer the household, the greater the financial velocity.

Subir and Mumtaz, for example, borrowed six times in two months—tiny sums between neighbors, rarely more than four dollars, but enough to ensure food each night. These short-term loans kept the family afloat in bad weeks. For them, saving wasn’t about long-term goals—it was about ensuring there was rice tomorrow.

The Triple Whammy in Action

Most of the diary households live under the “triple whammy”: incomes that are low, irregular, and unpredictable. Farmers earn only at harvest; construction workers rely on daily contracts; street vendors depend on good weather. The state’s help is minimal, and private lenders often exploit need. To handle this chaos, poor households lean heavily on informal networks—borrowing and lending between friends, keeping small savings at home, or joining savings clubs called ROSCAs (rotating savings and credit associations).

“If you’re poor, there’s no alternative. You have to do it to survive.” —Khadeja, Bangladesh

This quote captures how money management becomes an unavoidable daily labor, not a luxury.

Informal Networks: The Hidden Banking System

Across all three countries, informal grants and loans are the most common form of finance. In Bangladesh, 88% of borrowing happens through local connections—neighbors, relatives, employers, or even “moneyguards” who hold cash safely for others. These interest-free exchanges are the poor man’s credit line and often form reciprocal relationships: I lend you today; you lend me tomorrow.

The cost is emotional. Borrowing from friends can mean shame or strained relations. As one respondent put it, “I feel proud when I give loans and shameful when I have to take them.” The tradeoff: secure small loans quickly versus preserving dignity and privacy.

Formal Finance vs. Real Needs

Formal financial institutions rarely design products that fit the poor’s rhythm of life. Loan terms are fixed; repayment schedules inflexible. Contrast that with informal flexibility—neighbors forgive delays, shopkeepers extend credit, and repayment happens “whenever possible.” Poor families value flexibility even if it costs them more. Formal banks could learn from this: bite-size payments and adaptable credit lines meet the real financial behavior of the poor.

Innovations like India’s Kishan Credit Card, which allows farmers to borrow and repay as needed within a year, show how formal systems can adapt to irregular income flows. Similarly, South African micro-lenders now experiment with short-term “emergency loans” and flexible grant timing—both ideas trace back to what the poor already do informally.

The Lesson

For the poor, financial mastery means keeping cash flowing, not merely accumulating assets. Every week brings new improvisations—borrowing to eat, lending to others, juggling small debts. It’s a complex choreography of survival, one that mirrors business cash-flow management more than household budgeting. As the authors conclude, “Money management is not what the poor do despite being poor—it’s what they do because they are poor.”

For the poor, life’s unpredictability isn’t just stressful—it’s dangerous. A single illness, crop failure, or funeral can plunge them into years of debt. Chapter Three of Portfolios of the Poor calls this the relentless exposure to risk, and it shows how families patch together protection long before formal insurance ever reaches them.

Life on the Edge

Take Jaleela from Bangladesh. When dysentery struck her and her baby, her husband pawned her marriage jewelry to pay medical bills. Later, when he fell ill, neighbors fed the family for three days. Each time, the crisis was both medical and financial. This pattern—illness becomes debt—runs through hundreds of diaries. Poor health and poor cash flow are inseparable.

The Most Common Emergencies

Across the diaries, 167 major emergencies were documented—illness, injury, loss of income, property damage, and death. In South Africa, funerals dominate; in India and Bangladesh, medical crises and crop failures lead. The problem isn’t just the event—it’s how to pay for it when resources are locked up in distant savings or unreliable accounts. Without insurance or steady income, families sell livestock, withdraw savings, or take quick informal loans—each strategy carrying hidden costs.

Funerals and Social Obligation

In rural South Africa, funerals are financially devastating. Custom demands expensive ceremonies, and the spread of AIDS has made deaths more frequent. A single funeral can cost seven months of income. To cope, nearly every household invests in multiple funeral insurance systems—both formal (company funeral plans) and informal (burial societies). Between them, these instruments can cover half of funeral expenses, leaving the rest to relatives and savings clubs. Funerals show how community and finance intertwine—the monetary and emotional costs are shared.

“Insurance, for the poor, works best when it’s local, flexible, and based on trust.”

Improvised Insurance Systems

Lacking formal coverage, families self-insure through networks and clubs. Burial societies pay modest sums upon death; Indian families rely on relatives; Bangladeshi microfinance groups offer “credit-life” protection that cancels loans upon the borrower’s death. But these systems are patchy. Pro-poor insurance schemes in Bangladesh collapsed amid mismanagement and fraud, reminding us that reliability matters more than cheapness.

The Moral Hazard Paradox

Economists worry that insurance might make people careless (“moral hazard”). Yet, in poor communities, the opposite occurs. Because medical care is expensive, families delay treatment until illness becomes catastrophic. Feizal, an Indian trader, ignored his broken leg for months to save money—ending up spending eight months’ income when the wound worsened. Better insurance would have encouraged earlier, cheaper treatment.

Building Better Tools

The authors propose “microinsurance partnerships,” combining formal insurers’ expertise with microfinance networks’ local trust. These hybrid schemes could collect tiny premiums regularly and pay out quickly when disaster strikes. True safety for the poor means systems that are simple, predictable, and close to home. Until then, as the diaries show, poor families will keep doing what they’ve always done—turning to each other and managing risk one emergency at a time.

Even the poorest need big chunks of money—weddings, school fees, home repairs, or medical costs. But how do you save for the future when income barely covers today? The answer lies in ingenious methods of building “usefully large sums,” turning pennies into possibilities. In chapter four, the authors explore how poor households combine saving and borrowing to produce meaningful lump sums.

Nomsa’s Story: Saving a Third of Her Pension

Meet Nomsa, a 77-year-old grandmother in rural South Africa living on $115 per month from her government pension. Despite supporting four grandchildren, she saves $40 monthly through two informal savings clubs. Her story shatters assumptions: even the poorest can save substantially. Like most low-income people, Nomsa saves not in a bank but in community-run “clubs” where structure and social pressure create discipline.

Accumulators and Accelerators

The book distinguishes between two tools for building lump sums. Accumulators are savings devices—money grows gradually through discipline and structure. Accelerators are loans—money arrives quickly and is repaid over time. Both serve the same purpose: transforming small, regular sums into large, useful amounts. Khadeja, another Bangladeshi woman, took a microloan at 36% annual interest not to start a business but to buy gold—a lifelong asset for security. Paying weekly forced her to save through debt, proving that borrowing can be a pathway to discipline.

Saving Clubs as Social Finance

The most creative savings networks resemble mini-banks—with built-in social contracts. Nomsa’s “saving-up club” collects monthly contributions and distributes the full pot at year-end before Christmas. Her second club, a RoSCA (rotating savings and credit association), rotates payouts—each member gets the full pot once per cycle. Such clubs thrive because they merge psychology and community: people save to avoid letting friends down. The obligation ensures consistency more effectively than impersonal banking.

“You feel compelled to contribute. If you don’t, it’s like letting your friends down.” —South African diarist

From Saving Clubs to Smart Products

These informal devices demonstrate behavioral wisdom long before economists studied it (as seen later in Thaler and Sunstein’s Nudge). Structured savings protect money from impulse spending and help build commitment. In the Philippines, commitment accounts offered by banks raised savings by 80%, echoing the success of savings clubs. It’s not about how much people earn—it’s about how they organize saving.

Limits and Lessons

Despite popularity, clubs can fail—members default, treasurers are robbed, or savings vanish. Informal systems are short-term and fragile; they seldom support long-term asset-building. That’s where microfinance can help by offering structured, longer-term versions of these devices. The authors argue that the best hope lies in merging the old with the new—community trust plus institutional reliability.

Building lump sums proves that poverty isn’t an absence of ability—it’s a lack of tools. When savings are reliable and structured, even two-dollar earners can transform their finances. As Rutherford notes, “Borrowing can be the quickest way to save.” That paradox captures the inventiveness of human finance at its hardest edge.

Why do the poor sometimes pay what seem like outrageous interest rates—and still borrow again? The answer, the authors show, is that money for the poor doesn’t work like money for the rich. In their world, interest is often a fee for flexibility, not a penalty for poverty.

Interest as a Fee, Not a Rate

In wealthy economies, money has time value: interest compounds daily, and annual rates guide decisions. But among the poor, the idea of “annualized interest” makes little sense. When Subir in Bangladesh borrows $10 for a week and pays 25 cents, it’s a fee for immediate liquidity—he doesn’t care that the annualized rate is over 260%. As the authors note, using annualized comparisons distorts poor households’ reality. They evaluate loans in absolute terms: Can I afford the fee today?

Flat vs. Flexible Pricing

In South Africa, moneylenders charge a “flat” 30% per month. But repayments vary widely—it may take a few days or several months. If you repay early, the implicit monthly rate skyrockets; if late, it declines. For borrowers, this isn’t irrational—it’s adaptive. Clearing debt fast keeps creditworthiness intact for the next emergency. The poor pay high rates not for profit but for trust and immediacy. They’d rather pay more to borrow from someone reliable and quick than bargain for delay.

Negotiating and Forgiveness

Much of the so-called “usury” is softened by community norms. In India and Bangladesh, lenders and borrowers renegotiate constantly; interest is forgiven more than half the time. A neighbor lending money doesn’t behave like a bank—they act from obligation and shared survival. The authors record cases where old debts were simply erased after floods or illness. In the informal economy, relationship trumps contractual price.

From Moneylenders to Savings Collectors

Just as borrowers pay to borrow, savers often pay to save. Jyothi, a savings collector in Andhra Pradesh, visits neighbors daily to collect coins for safekeeping. At month’s end, she returns their money minus one day’s deposit—an annualized negative interest of 30%. Yet her clients are grateful; they pay for discipline and security. Likewise, Ghanaian “susu collectors” take traders’ daily deposits and return all but one day’s worth. Paying to save becomes rational when safety and routine matter more than yield.

Microfinance and Fair Prices

Microfinance institutions like Grameen or ASA charge around 20–40% annually—high compared to bank loans but far lower than moneylenders. These prices reflect small transaction sizes and the cost of reliability. As Muhammad Yunus argues, fair interest isn’t free—it’s what sustains trustworthy access. Attempts to cap prices risk closing viable services. What matters most to customers isn’t cheapness—it’s certainty: the promise that their loan will arrive when needed and at the agreed price.

The “price of money,” therefore, tells a powerful story about value and trust. The poor are not duped—they’re pragmatic. Paying to save, borrowing at high rates, and choosing reliability over cost reveal an intuitive sophistication. As the authors conclude, “For the poor, convenience, flexibility, and reliability are not luxuries—they are the price of survival.”

Microfinance has changed the face of poverty alleviation. Yet even its origins—the iconic Grameen Bank—had to reinvent itself. Chapter six describes Grameen’s transformation from microcredit pioneer to full-service financial institution, inspired by the very lessons this book uncovers.

The Grameen II Shift

By the late 1990s, floods and mounting repayment problems pushed Grameen into crisis. Its rigid one-year loans, weekly payments, and business-use-only rules no longer fit customers’ fluctuating realities. Muhammad Yunus realized that poor families needed flexibility more than uniformity. Grameen II introduced multiple loan terms (three months to three years), rescheduling options, and “top-ups” allowing borrowers to refresh loans to their original value mid-cycle. The result: renewed trust and faster recovery.

From Credit to Comprehensive Finance

Grameen II expanded beyond lending. It launched personal passbook savings accounts for daily convenience and commitment plans—the Grameen Pension Savings (GPS)—to accumulate long-term wealth. By 2004, Grameen’s deposits exceeded its loans. The world’s most famous microcredit bank had become a full retail bank for low-income clients.

Real Lives Changed

Consider Kapila Barua, who used her flexible savings account to manage school fees and medical costs; or Ramna, who used top-up loans to pay for medicine and funerals without defaulting. Sankar, a rickshaw driver, shifted from borrowing to steady saving for his children’s future through the GPS plan. These cases show the shift from crisis finance to proactive planning.

A Model for Future Banking

Grameen’s success inspired imitators worldwide—from ASA in Bangladesh to Equity Bank in Kenya. But challenges remain: meetings consume women’s time, products still lean toward loans, and men remain under-served. The next generation—what the authors call “Grameen III”—could go further by integrating technology, gender balance, and specialized savings, insurance, and home-improvement facilities. In short, microfinance must continue evolving into a system of reliable, flexible money management rather than simple small-business lending.

Grameen’s journey proves a striking truth: the poor don’t just need credit—they need complete financial lives. When microfinance becomes banking for all, poverty transforms from a trap into a solvable challenge.

The final lesson of Portfolios of the Poor is simple yet profound: being poor doesn’t mean being financially ignorant—it means being financially constrained. The key to escaping poverty lies not only in more income but in better portfolios—reliable, flexible, and convenient tools to manage that income.

Three Big Opportunities

The authors identify three main gaps—and thus three opportunities—for future innovation:

• Helping the poor manage daily cash flow by offering small, frequent-dollar services—flexible savings, quick loans, and mobile access.
• Helping the poor build long-term savings, similar to the GPS plan, to cover weddings, education, and retirement.
• Helping the poor borrow for all purposes—not just microenterprise, but health, housing, and emergencies.

Guiding Principles for the Future

The next wave of microfinance innovation must rest on four principles:

• Reliability: Deliver services consistently—loans dispersed predictably, savings accessible on demand.
• Convenience: Bring banking to the doorstep through mobile agents or apps, mirroring informal collectors like Jyothi.
• Flexibility: Design repayment schedules that match real lives, with grace periods and variable terms.
• Structure: Encourage self-discipline through scheduled visits or automated deductions.

Universal Financial Access

In the race to reach every global citizen, financial services may become the first reliable universal system for the poor—before health or education. Modern technologies like Kenya’s M-Pesa mobile banking show how universal access is possible even in rural areas. The vision is not charity but inclusion—poor people using the same financial infrastructure as the rich, tailored to their cash-flow realities.

The Ultimate Lesson

Money management is life management. Without safe ways to save, borrow, and insure, every setback becomes a crisis. The authors invite us to redefine poverty not just as a lack of income, but as a lack of financial reliability. The future they envision—microfinance connected to mobile technology, social trust linked to institutional support—could make “banking for the poor” the world’s first truly global service. In their words, “Not having enough money is bad enough. Not being able to manage whatever money you have is worse.”